Gross margin formula by category, on the price customers paid
The short answer
The gross margin formula divides net sales minus cost of goods sold by net sales. For each category, use the price customers actually paid after discounts and returns, and the cost of the units they kept. Categories that look healthy at list price often fall several points once discounts come off.
Gross margin by category, worked through
Why it matters
Gross margin at list price flatters categories that sell mostly on promotion. Measuring it on the price customers paid shows which categories fund the business and where discounting has eaten the margin you planned when the range was bought.
The question to ask
Copy this into Lexi as written.
How to work it out
1. Use the price paid. Total net sales by category from the price customers paid after discounts, minus returns.
2. Match cost to units kept. Take the landed cost of goods for the units sold and not returned in each category.
3. Calculate and compare. Apply the formula, compare each category's margin on price paid with its planned full-price margin, and check which customers buy it on discount.
What the answer looks like
Illustrative output on sample data
Illustrative example: how Lexi answers this for a footwear retailer. It calculates gross margin by category for a year on the price customers paid.
- Running: $8.4 million net sales, $4.2 million cost. Gross margin = (8.4 - 4.2) ÷ 8.4 × 100 = 50%.
- Casual sneakers: $6.0 million net sales, $3.9 million cost. Gross margin 35%.
- Boots: $5.1 million net sales, $2.86 million cost. Gross margin 44%.
What the data shows
Casual sneakers were planned at 52% but delivered 35%, because 60% of units sold on promotion.
What it means
Most promotional sneaker buyers buy nothing else at full price. Running customers come back for socks and accessories.
What to do
Reduce promotion depth on casual sneakers and buy them shallower next season.
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Frequently asked questions
What is the difference between gross margin and markup?
Gross margin divides profit by the selling price, while markup divides the same profit by cost. Because cost is the smaller base, markup is always the higher percentage for the same item. Retailers often price with markup and report with margin, so mixing the two leads to planning errors.
What is a good gross margin for a retailer?
It varies widely by sector. NYU Stern professor Aswath Damodaran's January 2026 dataset of US public companies puts average gross margin at about 35% for specialty retail, 34% for building supply and 33% for general retail. Treat those as broad context, and set targets from your own categories' history.
Why calculate gross margin on the price customers paid?
Margin at list price assumes every unit sold at full price, which rarely happens. Discounts, markdowns and member pricing all reduce what you collect, while cost stays the same. Calculating on the price paid shows the margin you actually earned, and how much discounting took from each category.